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Question) A manufacturing entity buys a machine (an item of property, plant and equipment PPE) for 20 million dinars on 1 January 20X1. The machine is held under the Revaluation model and was attributed a useful economic life of 20 years. The entity has a reporting date of 31 December 20X1 and a functional currency of dollars($) Exchange rates are as follows:
1/1/20X1 : 2 Dinars – $1
31/12/20×1 : 3 Dinars -$1The fair value of the machine at 31 December 20X1 was 32 million dinars.
What is the carrying amount of the machine at 31 December 20X1 ?
Hi sir, for the above question I have done up my workings. Can you correct me when i’m wrong ?
Workings:
Revaluation model – Therefore, revalue to 32million dinars (Fair value) at end of yearInitial transaction:
2 dinars – $1
32million – $16 millionDr PPE $ 16 million
Cr Payables $16 millionSince PPE is a non-monetary item, it should be left at $16 million. In addition, since depreciation is given, we must account for it.
Depreciation for 1 year
= $16 million / 20 years
= $0.8millionTherefore, carrying amount at 31 December 20X1
= $16 million – $0.8million
= $ 15.2 millionAm I right sir ?
“Initial transaction:
2 dinars – $1
32million – $16 millionDr PPE $ 16 million
Cr Payables $16 million”I believe that the initial transaction was buying the machine for 20 million dinars on 1 January 20X1 and that the double entry to record that acquisition should be:
Dr TNCA (20 million dinars @ 2 dinars = $1) $10,000,000
Cr Cash / Payables $10,000,000At the end of the first year there should be depreciation of $10,000,000 / 20 = $500,000 and a carrying value of $9,500,000
Then we revalue to 32 million dinars and that, at the rate of 3 dinars = $1, equates to $10,666,667 = a revaluation surplus of $1,166,667
I believe that’s correct – but what does the solution suggest?
This question is not from my exam kit. The question in my exam kit was based on cost model. Therefore, i just wanted to understand how will it vary if the revaluation model is used.
So the value of the machine in the Statement of Financial Position will be $10.67 million with a revaluation gain of $1.17 million right sir ?
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